George Bush arrived in Jerusalem yesterday to celebrate Israel's 60th anniversary and talk up what has to be the most bizarre proposal yet for achieving peace: a "shelf agreement". This, Bush explained before he set out, would be a "description" of a Palestinian state to be hammered out between the Palestinian president Mahmoud Abbas and Israeli prime minister Ehud Olmert before the end of the year. The idea would then be to put this virtual state on the shelf until the time might be right for it to be turned into a reality. In perfect step, Tony Blair announced that he has succeeded in negotiating the removal of three checkpoints and one roadblock on behalf of the Quartet of big powers and the UN - out of a total of 560 throughout the West Bank - but Israel will only actually remove them "in the future".

In other words, it's business as usual, as the crisis of occupation deepens. Neither man, meanwhile, seems to have thought it right to offer any words of condolence to the Palestinians, whose national dispossession and suffering were also unleashed by the creation of the state. That is why today - the anniversary of the end of the British mandate in Palestine and the declaration of Israeli statehood - is also a day of mourning for 10 million Palestinians and their supporters: the commemoration of the nakba, or catastrophe, that led to the destruction of their society and expulsion from their homeland. Ninety years after the Balfour declaration - when on behalf of one people a British cabinet minister famously promised a second the land of a third - the ruins of more than 500 Arab villages destroyed and emptied of their people in 1948 can still be seen all over Israel.

That ethnic cleansing began months before the end of British rule, as has been meticulously documented by Israeli historians such as Benny Morris and Ilan Pappe, and before the arrival of the Arab armies, who mostly fought in areas earmarked by the UN for an Arab state. Sixty years ago, Arab Jaffa, now part of Tel Aviv, had just fallen to the forces of the embryonic Israeli state and tens of thousands of Palestinians had fled or been driven out, some of them literally into the sea. From there, they were evacuated by boat to Gaza, where 80% of the population today are refugee families from what is now Israel.

Morris now argues that ethnic cleansing was justified because a Jewish state "would not have come into being without the uprooting of 700,000 Palestinians. There was no choice but to expel that population". It would certainly have been a different kind of state, but the expulsion was also a crime with devastating consequences both for the Palestinians and the Middle East. By the time the fighting ended in 1949, Israel had expanded its territory from 56% to 78% of Palestine, and the large majority of the Arabs, who made up two-thirds of Palestine's population before 1948, had become refugees barred from returning to their homes. The same process was repeated on a smaller scale when Israel conquered the rest of Palestine in 1967. And today the Palestinians are still waiting for the state which the UN voted to award them in less than half their own land - and they rejected as unjust - more than 60 years ago.

It is to Britain's historic shame that having played such a central role in the creation of the Israel-Palestine conflict and the dispossession of a people it had promised to protect, it has done so little to try to right those wrongs. In Gordon Brown's message of congratulation to Israel, he didn't find it possible even in passing to regret the terrible injustices its foundation entailed. The fact is that the takeover of Palestinian land by overwhelmingly European settlers could only have happened under colonial rule, a reality which only fuels the long-term bitterness of the conflict.

Israel was, of course, also born out of idealism and genocidal horror in Europe and can boast remarkable achievements. But it was the tragedy of the Zionist project that Jewish self-determination could only be achieved at another people's expense. Israel's independence and the Palestinian nakba are not just different national narratives, but diametrically opposed experiences which make one-sided tributes to Israeli nationhood seem so brutally galling in the Arab and Muslim world and beyond.

Meanwhile, the western failure to take responsibility for the gaping wound it has inflicted on the Middle East is allowing the chances of the most plausible settlement - the much-acclaimed two-state solution - to slip away. While all Palestinian factions are in practice now prepared to end the conflict in exchange for 22% of historic Palestine and acknowledgement of the refugees' right to return, there is clearly not remotely the commitment necessary in either Israel or its US sponsor to push through even such a lop-sided settlement. And as the carving-up of the West Bank into walled reservations, ever-expanding colonies and settler-only roads make the prospect of a viable state appear increasingly unlikely, it also seems to many Palestinians to have less and less to do with their aspirations to self-determination and dignity.

For some, that means returning to the goal of one state for both peoples - which has very few takers among Israeli Jews. Given that Palestine has effectively been one state under Israeli rule for more than 40 years - longer, for instance, than East Germany existed - others are being drawn towards a struggle for equal rights on the anti-apartheid model. Now there are almost as many Palestinians in Palestine as Israeli Jews, that appears an increasingly realistic option. It also causes panic in the Israeli establishment: "If the day comes when the two-state solution collapses," Olmert warned recently, "and we face a South African-style struggle for equal voting rights ... the state of Israel is finished."

What is certain is that there is no future for either Israelis or Palestinians in managing the status quo. If the Palestinians face nothing but shelf agreements and continued repression - 312 Palestinians have been killed by the Israeli military this year, 197 of them civilians, while five civilians and five soldiers have been killed on the Israeli side - the prospect must be of an escalating spiral of violence and misery. The commitment to Palestinian rights should first of all be a question of justice. But, given the toxicity this conflict brings to the entire relationship with the Muslim world, it is also a matter of obvious western self-interest. s.milne@guardian.co.uk